Survival Guide to Fashion Industry Giants' Bankruptcies
When Nasty Gal filed for bankruptcy last November, it piqued my interest in why fashion brands go bankrupt and the current trends happening in bankruptcy.
Bankruptcy is when a company is unable to pay back its loans. What sometimes happens is companies overestimate their forecasted growth, take out large loans, and can’t pay them back because their predicted growth ends up being unrealistic and unattainable. Plus any possible profits go towards the interest payment on the debt.
Bankruptcy is common today among many industries including fashion. When a company goes bankrupt, they often choose what’s called Chapter 11 Bankruptcy, also known as the “reorganization” bankruptcy. This means they can continue to operate the business under the terms of their bankruptcy filing agreement with the court. Nasty Gal chose this route, so they can run day-to-day business unchanged under the “reorganization.”
When a company announces that it is seeking to fund, this can be an indication of financial instability. Companies will put a positive spin on the public announcement by declaring that it is to fuel their forecasted growth, but there are usually things happening behind the scenes they’re not sharing, like out-of-control expenses or mismanaged money.
Once the investment is acquired, a company is under severe pressure to turn a profit for the investors. It can be a tight timeline with unrealistic expectations of unachievable growth. If a company falls short of that expected growth, there becomes a need for more money to grow the business faster. This can trigger a snowballing effect of receiving funding, failing to meet financial goals, requiring more money which comes with higher financial goals that go unmet, and on and on.
If the investors and business owners have conflicting goals, the partnership will be rocky at best, and most likely end in failure. Investors usually want big short-term growth. It’s normal for them to expect 10X their initial investment within 5 years. They then exit the company and move on to their next money-maker. Business owners usually want stable, long-term growth. They’re looking for a profitable, reliable, self-sustaining business that comfortably provides for themselves and their family for a lifetime. Unfortunately, it’s unheard of to have both a stable, profitable business and skyrocketing profits. Anything done quickly to extremes is inherently unstable.
If a company receives funding and soon after announces it has attained significant growth, it doesn’t mean it’s making a profit. A boost in sales and revenue doesn’t equal profit. There could be a huge boost in expenses as well, which would mean a company could have significant growth while breaking even, or perhaps even losing money putting them deeper into debt.
Some brands that filed for Chapter 11 Bankruptcy in 2016 besides Nasty Gal include Aeropostale, Pacific Sunwear, and American Apparel (for the second time).
Some brands that filed for Chapter 11 Bankruptcy in 2015 include Cache, Wet Seal, Quicksilver, and American Apparel (for the first time).
There’s a definite pattern here of teen-specific retailers. Digging deeper into this pattern, we see there are a few key points that have contributed to their downfall.
- Teen trends have accelerated in the past ten years, while retailers trends have remained stagnant. They haven’t kept up, and teenagers have left them in the dust, turning to brands that can satisfy their insatiable appetite for newness.
- Teen trends used to be a segregated niche, independent from runway trends. With the rise of the internet and easy access to viewing runway collections, teen trends became heavily influenced by top rank designers. Brands like H&M, Zara, Forever 21, and online niche brands made successful businesses out of selling cheap runway copies, absorbing teens’ disposable income.
- These outdated teen retailers thrived when teen style was homogenous. Teens now live online, and social media celebrates diversity. To be popular online, you have to stand out. Today, Instagram followers is a more valuable currency than a fellow student’s opinion. Just like the success of businesses, bloggers and brands are based on their social media following and online reviews, teenagers’ acceptance among peers is heavily based on the online reputation.
The technology significantly changed the fashion industry, and these troubled brands didn’t keep up. But since it’s Chapter 11 Bankruptcy, we’ll still see these brands around while they’re struggling to keep up. It will be interesting to see if they can make their second chance a success.
The luxury side has also seen some rocky times. Scottish designer Jonathan Saunders closed his brand in 2015 and is now Chief Creative Officer at Diane Von Furstenberg. English designer Matthew Williamson closed his NYC and London flagship stores to focus on e-commerce. NYC brand Honor ceased their ready-to-wear collection and now focused on bridal and custom orders. NYC brand Suno shut their doors after eight years in business.
What’s business to do? Too many clothes, too little customers. The competition is cut-throat.
All apparel sales are hugely affected by where and how consumers spend money.
Consumers are spending more on things like:
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Cell phones and internet subscriptions (Technology purchases)
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Vacations, concerts, eating out, gym memberships, skydiving (Experience-based purchases)
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Maid-service, food delivery, laundry service (Personal service purchases)
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Dance classes, vocal lessons, self-improvement workshops, educational seminars (Skill-based and personal enrichment purchases)
Money that is spent on clothes is spent differently.
Consumers are spending less on clothes, and the number one reason is that they can. Discounts, coupons, and clearance sales are the only way a lot of consumers will spend money. Retail price is seen as highway robbery. The concept of sales worked well when they existed to move last season’s inventory or to liquidate a closing store. Sales used to be a special occasion when they were rare, and they did what they were supposed to do. Now that sales are so frequent, consumers expect a discount whenever they decide to make a purchase. Retail has become a race to the bottom with cutting prices.
While fast fashion is going strong, there has been a rise in the opposite; minimalist style and capsule wardrobes. Consumers are rapidly becoming aware of how much waste is produced in fashion. The customers that will pay a premium price and expect timeless styles and high quality for maximum garment life.
No one company or industry is immune to bankruptcy. Even big names like Betsey Johnson, Michael Kors, and Balmain have filed for bankruptcy. In 2012, 1993, and 2004 respectively. Balmain is moving along unphased with Kim and Kanye’s unwavering support. Michael Kors was on Forbes Billionaires list in 2014. And Betsey Johnson is chugging along with a lower-priced mass-produced apparel and accessories line.
Learn from the big wigs, and Chapter 11 Bankruptcy could be your road to redemption.
Other Interesting Reads:
How to Close a Store by Racked
Retail Woe: A Bankruptcy Timeline by The Fashion Law
Fashion Brands- including several LA brands are dying off as Shoppers' Habit Change by Los Angeles Times
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